The EBA launches consultation to incorporate ESG risks into the governance, risk management and supervision of credit institutions and investment firms

03 November 2020

  • The paper identifies for the first time common definitions of ESG risks, building on the EU taxonomy, and provides an overview of current evaluation methods.
  • The paper outlines recommendations for the incorporation of ESG risks into business strategies, governance and risk management as well as supervision.

The European Banking Authority (EBA) published today a Discussion Paper on Environmental, Social and Governance (ESG) risks management and supervision aiming to collect feedback for the preparation of its final report on the topic. The Discussion Paper provides a comprehensive proposal on how ESG factors and ESG risks could be included in the regulatory and supervisory framework for credit institutions and investment firms. The consultation runs until 3 February 2021.

The main focus of this Discussion Paper is on the risks to which institutions are exposed via the impact of ESG factors on their counterparties. The Paper provides details on the risks stemming from environmental factors, especially climate change, and illustrates ongoing initiatives and progress achieved on this topic over the recent years.

The EBA sees the need for enhancing the incorporation of ESG risks into institutions’ business strategies and processes and proportionately incorporating them into their internal governance arrangements. This could be done by evaluating the long-term resilience of institutions’ business models, setting ESG risk-related objectives, engaging with customers and considering the development of sustainable products. Adjusting the business strategy of an institution to incorporate ESG risks as drivers of prudential risks should be considered as a progressive risk management tool to mitigate the potential impact of ESG risks.

Also the existing supervisory review processes might not sufficiently enable supervisors to understand the longer-term impact of ESG risks on future financial positions and related long-term vulnerabilities. Therefore, the Discussion Paper proposes to enhance the existing supervisory reviews with ESG factors and, more importantly, to introduce a new area of supervisory analysis and evaluation of the long-term resilience of the business model against the time horizon of the relevant public policies or broader transition trends. 

Consultation process

Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 3 February  2021. All contributions received will be published following the end of the consultation, unless requested otherwise.

A public hearing will be organised in the form of a webinar on 26 November from 14:00 to 17:00 CET. The EBA invites interested stakeholders to register using the link below: Link

The dial in details will be communicated in due course.

Legal basis and background

Article 98(8) of the Capital Requirements Directive (CRDV) and Article 35 of the Investment Firms Directive (IFD) mandate the EBA to develop a report providing uniform definitions of ESG risks, and appropriate qualitative and quantitative criteria (including stress test and scenario analysis) for the assessment of the impact of ESG risks on the financial stability of institutions in the short, medium and long term. They also mandate the EBA to elaborate on the arrangements, processes, mechanisms and strategies to be implemented by institutions to identify, assess and manage ESG risks and to assess the potential inclusion of ESG risks in the review and evaluation performed by competent authorities.

The feedback received through the Discussion Paper will inform the EBA final Report on management and supervision of ESG risks for credit institutions and investment firms. It will be also taken into account for the EBA’s ongoing work related to the fulfilment of its mandates to develop a technical standard implementing the ESG risks Pillar 3 disclosure requirements included in Part Eight of the Capital Requirements Regulation (CRR2 - Article 434a and 449a) and to assess whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives would be justified as a component of Pillar 1 capital requirements (Article 501c of CRR  2), as explained in the EBA Action Plan on Sustainable Finance.

 

EBA launches consultation on revised Guidelines on sound remuneration policies

29 October 2020

The European Banking Authority (EBA) launched today a public consultation on revised Guidelines on sound remuneration policies.  This review takes into account the amendments introduced by the fifth Capital Requirements Directive (CRD V) in relation to institutions’ sound remuneration policies and in particular the requirement that those remuneration policies should be gender neutral. The consultation runs until 29 January 2021.

The principle of equal pay for male and female workers for equal work or work of equal value is laid down in Article 157 of the Treaty on the Functioning of the European Union (TFEU). Institutions need to apply this principle in a consistent manner. In this context, the revised Guidelines specify that institutions should implement a gender-neutral remuneration policy.  The EBA will follow up on institutions’ practices with a report to be published within two year after the publication of the final guidelines.

All institutions are also required to apply sound and gender neutral remuneration policies to all staff. In particular, for the variable remuneration of staff, whose professional activities have a material impact on the institution's risk profile (identified staff), additional requirements apply. The revised Guidelines specify all those requirements, and the waivers, which apply to institutions based on their total balance sheet and to staff with a low variable remuneration. The waivers only apply to the deferral arrangements and pay out in instruments.

The revised Guidelines also clarify how the remuneration framework applies on a consolidated basis to investment firms and others financial institutions that are subject to a specific remuneration framework (for example, firms subject to the Undertakings for Collective Investment in Transferable Securities Directive (UCITS), the Alternative Investment Fund Managers Directive (AIFMD) or the Market in Financial Instruments Directive (MiFID)) and are not any longer subject to the so called bonus cap.

Finally, the sections on severance payments and retention bonuses have been revised based on supervisory experience regarding cases of circumvention.

Consultation process

The EBA invites comments solely on the proposed amendments to the EBA Guidelines on sound remuneration policies as shown in the tracked changes version. Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 29 January 2021.

A public hearing will take place on 13 January 2021 from 14: 00 to 15:30. All contributions received will be published following the end of the consultation, unless requested otherwise.

Legal basis and next steps

These draft Guidelines have been developed on the basis of Article 74 and 94 of Directive 2013/36/EU, which mandate the EBA to further specify and harmonise institutions’ remuneration policies.

The EBA Guidelines will apply to Competent Authorities across the EU, as well as to institutions on a solo and consolidated basis as further specified in the guidelines. Once the revised Guidelines will enter into force, the 2015 Guidelines will be repealed

EBA issues Opinion on measures to address macroprudential risk following notification by Finansinspektionen

19 October 2020

 

The European Banking Authority (EBA) published today an Opinion following the notification by Finansinspektionen, the Swedish Financial Supervisory Authority (FSA), of its intention to extend a measure introduced in 2018, which aims at enhancing the resilience of Swedish banks to potential severe downward corrections in residential real estate markets. Based on the evidence submitted, the EBA does not object to the extension of such measure, which Finansinspektionen intends to apply to credit institutions that have adopted the Internal Rating-Based (IRB) Approach. The extension will be applied from 31 December 2020 until 30 December 2021.

With the extension of the proposed measure, Swedish institutions adopting the IRB approach would be subject to a minimum level of 25% risk weight on Swedish retail loans secured by real estate. This risk weight floor will act as a backstop to ensure that these credit institutions fully capture the risk of credit losses stemming from a severe downward correction in real estate markets.

In its Opinion, addressed to the Council, the European Commission and the Swedish Authorities, the EBA acknowledges, in line with the recommendation on medium-term vulnerabilities in the residential real estate sector in Sweden issued by the European Systemic Risk Board (ESRB), that the combined increase in house prices and debt levels could pose a threat to the financial stability in Sweden in the event of a downturn. The EBA also encourages the Swedish authorities to monitor closely the developments during the COVID-19 pandemic and potential unintended consequences.

In light of this conclusion, the EBA does not object to the extended deployment, by Finansinspektionen, of macroprudential measures, which will be applied from 31 December 2020 until 30 December 2021.

Background

Already in its Opinion issued on 28 June 2018, the EBA did not object to the adoption of this measure, taking into consideration its effect on increasing the resilience of the Swedish banking sector. For more information on this EBA Opinion, please see this news item

EBA consults on the revision of the Guidelines on major incident reporting under PSD2

14 October 2020

The European Banking Authority (EBA) launched today a public consultation to propose revising the Guidelines on major incident reporting under the Payment Service Directive (PSD2). The proposal aims at optimising and simplifying the reporting process, capturing additional relevant security incidents, reducing the number of operational incidents that will be reported, and improving the meaningfulness of the incident reports received. The revision of the Guidelines also intends to decrease the reporting burden on payment service providers (PSPs). The consultation runs until 14 December 2020.

The existing Guidelines on major incident reporting set out, inter alia, the criteria, thresholds and methodology to be used by PSPs to determine whether or not an operational or security incident should be considered major and how said incident should be notified to the CA in the home Member State.

The consultation paper proposes the introduction of the new incident classification criterion ‘breach of security measures’ to capture security incidents where the breach of the security measures of the PSP has an impact on the availability, integrity, confidentiality and/or authenticity of the payment services related data, processes and/or systems. The consultation paper also introduces changes to the thresholds for the calculation of the criteria ‘transactions affected’ and ‘payment service users affected’.

In addition, to improve the quality of the reports collected, the EBA suggests the use of a standardised file for reporting major incident reports, streamlining the reporting template, and adding further granularity to the reported causes of incidents and aligning those to other incident reporting frameworks in the EU.

Finally, and crucially, as part of the changes introduced to reduce the reporting burden to PSPs, the EBA proposes to remove the regular updates on the intermediate report and to extend the deadline for submission of the final report.

Legal basis and background

Article 96(3) of Directive (EU) 2015/2366 on Payment Services in the Internal Market (PSD2) confers on the European Banking Authority (EBA) the mandate to develop, in close cooperation with the European Central Bank (ECB), Guidelines addressed to payment service providers on the classification and notification of major operational or security incidents, and to competent authorities on the criteria to assess their relevance and the details to be shared with other domestic authorities.

Article 96(4) of PSD2, in turn, requires the EBA, in close cooperation with the ECB, to review the Guidelines on a regular basis and in any event at least every 2 years.

Consultation process

Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 14 December 2020. All contributions received will be published following the end of the consultation, unless requested otherwise.

ESAs’ Board of Appeal dismisses case against ESMA on alleged non-application of Union law

12 October 2020

The Joint Board of Appeal of the European Supervisory Authorities (ESAs – European Banking Authority, European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority) published today its decision in the appeal case brought by Mr Howerton against the European Securities and Markets Authority (ESMA). The Board of Appeal’s decision considered as inadmissable the Appellant’s claim that six national financial supervisory authorities and ESMA should have taken supervisory steps in relation to an alleged non-application of Union law.

The Board of Appeal dismissed the appeal brought forward by Mr Howerton as inadmissible as the facts described by the Appellant do not relate in any way to aspects under the supervision of the relevant six national authorities nor of ESMA. The Board of Appeal does not see, therefore, how the six national financial supervisory authorities and ESMA could investigate and take supervisory steps with regard to the facts described by the Appellant in his complaints and in the appeal.

Background

Between 5 and 6 July 2020 Mr. Howerton sent several requests to investigate six national competent authorities under Article 17 of Regulation (EU) No 1095/2010. ESMA assessed the content of the requests to investigate and concluded that the facts described in the requests were outside its remit as they did not fall under any of the Union acts referred to in Article 1(2) of Regulation (EU) No 1095/2010. The Appellant filed an appeal against this conclusion on 3 August 2020.

ESAs launch survey on environmental and/or social financial product templates

21 September 2020

The European Supervisory Authorities (EBA, EIOPA and ESMA - ESAs) published today a survey seeking public feedback on presentational aspects of product templates, pursuant to Article 8(3), Article 9(5) and Article 11(4) of Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services (SFDR). The survey is open for comments until 16 October 2020.

The ESAs propose to standardise the disclosure of information for financial products that promote environmental and/or social characteristics or have a sustainable objective. The use of such mandatory templates will improve comparability of different financial products in different EU Member States and are intended to be included in existing disclosures provided by Alternative investment fund managers (AIFMs), Undertakings for Collective Investment in Transferable Securities (UCITSs), insurance undertakings, Institutions for Occupational Retirement Provision (IORPs) or providers of pan-European Personal Pensions Products (PEPPs).

 

In particular, the ESAs are inviting stakeholders to comment on the layout of the templates, which reflects the text of the draft Regulatory Technical Standards (RTS) from the recent public consultation on the SFDR that ran from 23 April until 1 September 2020.

 

The final content of the templates is subject to the outcome of a concurrent consumer testing exercise and the ESAs’ final report on the draft RTS under SFDR.

links

EBA issues revised list of ITS validation rules

10 September 2020

The European Banking Authority (EBA) issued today a revised list of validation rules in its Implementing Technical Standards (ITS) on supervisory reporting, highlighting those, which have been deactivated either for incorrectness or for triggering IT problems. Competent Authorities throughout the EU are informed that data submitted in accordance with these ITS should not be formally validated against the set of deactivated rules.

François-Louis Michaud starts today as new EBA Executive Director

01 September 2020

François-Louis Michaud has started today his new role as Executive Director of the European Banking Authority (EBA). Michaud, who was confirmed in this role after a plenary vote in the European Parliament on 8 July 2020, will serve a five-year renewable term.

EBA issues Opinion regarding the European Commission’s intention to amend the EBA’s final draft RTS on economic downturn

31 August 2020

The European Banking Authority (EBA) published today an Opinion in response to the European Commission’s intention to amend the EBAs final draft Regulatory Technical Standard (RTS) on the specification of the nature, severity and duration of an economic downturn. The EBA is of the view that the several changes introduced by the Commission would alter the agreed policy and, therefore, suggests changes with the aim of maintaining the agreed consensus of the originally submitted text.

The EBA’s Opinion identifies three substantive changes introduced by the European Commission. The first one is about the deletion of the requirement, which states that the economic indicators relating to one downturn period should be significantly correlated. The EBA is of the view that such requirement should be re-introduced. The second substantive change relates to the introduction of a proportionality principle for the cost of data (Recital 10 and Article 2), which alters the agreed policy. Here, the EBA suggests some redrafting to clarify the relevant data sources. Finally, for the third substantive change, which is about removing the possibility of considering a shorter time series than 20 years for economic indicators relating to an EU member state that joined the EU less than 20 years ago, the EBA agrees to Commission’s proposal despite the substantive nature of the change.

In addition, the EBA identifies a number of non-substantive and drafting changes, which, in its view, may unintendedly hamper the clarity of the text. The EBA is, therefore, proposing alternative drafting suggestions.

Legal basis and background

The EBA has delivered this Opinion in accordance with Article 10(1), subparagraph 6, of Regulation (EU) No 1093/2010, which requires the Authority to submit its response in the form of an opinion to amendments proposed by the European Commission.

The EBA had submitted its final draft RTS to the European Commission on 5 November 2018.

EBA makes available online tools to submit answers to its study of cost of compliance with supervisory reporting

14 August 2020

Following the launch of the industry questionnaire to support its work on optimising supervisory reporting requirements and reducing reporting costs for institutions, the European Banking Authority (EBA) has made available online tools to allow all stakeholders to submit their responses.

The EBA has set up two separate online surveys given the different deadlines for the qualitative and quantitative sections of the questionnaire.

Responses to the qualitative section of the questionnaire are expected by 1 October 2020, while those to the quantitative questions are expected by 31 October 2020.

Although answering the questionnaire is of voluntary nature, the EBA encourages a wide industry participation to ensure that the input into the analysis, and thus the basis for developing any related recommendation, is of good quality and representative for the EU banking sector.

Legal basis and background

The EBA is mandated by Article 430(8) of the CRR to measure the costs institutions incur when complying with the reporting requirements set out in the EBA’s ITS on supervisory reporting. Such reporting costs should be assessed since the introduction of the common supervisory reporting in the EU in 2013. The EBA is also asked to assess whether these reporting costs are proportionate with regard to the benefits delivered for the purposes of prudential supervision and make recommendations on how to reduce the reporting cost at least for small and non-complex institutions. The findings from this analysis should be formulated in a report and delivered to the European Commission and European Parliament in 2021.

The EBA has set up a dedicated page on its website  and email address cost.of.compliance@eba.europa.eu to support the cost of compliance exercise.